Attention New York City small business owners: it’s time to face the truth about merchant cash advances (MCAs) and their insidious factor rates. These financial predators are lurking in the shadows, ready to pounce on your hard-earned money. If you are looking for a cash infusion and thinking about signing up for an MCA, you need to understand the factor rate is your first line of defense.
What is a factor rate?
The factor rate is the weapon MCAs use to squeeze every last dollar out of you. Instead of being read as percentages like interest rates, factor rates are given in decimals. They range from 1.1 to 1.5, and it’s used to calculate the total amount you’ll pay back to the lender. Unlike an interest rate, which can change or be refinanced, the factor rate is fixed and unchanging.
How does it affect you?
- Fixed burden: The factor rate doesn’t fluctuate. Once it’s set, it’s set in stone. This means you’re locked into paying back a hefty sum, no matter how quickly you repay the advance.
- Total cost: To see the full damage, multiply your loan amount by the factor rate. For instance, a $50,000 advance at a 1.4 factor rate means you owe a staggering $70,000. That’s $20,000 in fees alone!
How lenders determine your factor rate
MCA companies are ruthless in setting factor rates, taking into account:
- Industry risk: Risky industries face higher rates. If your business has seasonal cash flow, expect to be struck.
- Experience matters: The longer you’ve been in business, the lower your factor rate might be. Newbies pay the price.
- Credit score: A poor credit history signals trouble, resulting in a sky-high rate. But many businesses with imperfect credit think they have no choice.
- Financial stability: Prove your business is stable, with solid cash flow and growth, to secure a better rate.
- Sales performance: Strong debit and credit card sales can lower your factor rate since MCAs are repaid through these transactions.
Take control
Don’t let MCAs and their brutal factor rates control your financial future. Arm yourself with knowledge and make informed decisions. Fight back against these oppressive rates and reclaim your business’s financial freedom by talking with an attorney about your rights.